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Growth versus Value Showdown

The two schools of investing - growth versus value remain a heated debate among investors. Both growth and value investors are equally passionate about the superiority of one investment style over the other.

Weighing the merits of these two competing investment styles is like choosing between oranges and apples. Both are good for you. And you may want both.

Value investors primarily invest in stocks that sell at a discount to the market. These diamonds in the rough bargain companies often have lower P/E ratios and higher dividend yields. Growth investors invest in stocks that grow faster than the overall stock market (either by revenues or cash flows and profits) and offer little or no dividends.

Growth stocks tend to outperform when the economy is performing well. Surprisingly, growth stocks have outperformed value stocks during the latter (mature) phase of a business cycle or just ahead of an economic recession, at least from a relative perspective. However, entering a recession or an economic contraction, especially during a severe or prolonged recession, both growth and value stocks decline on an absolute basis.

The two (2) ETFs include iShares S&P 500 Value ETF (IVE – 151.50) and iShares S&P 500 Growth ETF (IVW – 66.48). There is an overlap between the two ETFs regarding S&P 500 sectors and S&P 500 stocks. The primary difference is the allocations for the top holdings, specifically, the top 10 positions.

As of 5/30/23, 69.90% of the total IVE market weight comprised Financials (19.18%), Technology (18.23%), Industrials (11.99%), Consumer Discretionary (10.76%), and Communication Services (9.74%).

The top 10 holdings of IVE account for 25.98% of the total market weight of the ETF. They are MSFT (6.42%), AMZN (3.63%), META (3.62%), BRKB (3.60%), JPM (2.50%), CRM (1.36%), CSCO (1.28%), WMT (1.27%), BAC (1.22%) and NFLX (1.08).

Also, as of 5/30/23, the top S&P sectors of IVW account for 78.21% of the overall ETF market cap. The top sectors are Technology (36.42%), Healthcare (17.43%), Consumer Discretionary (9.66%), Communication Services (7.81%), and Financials (6.89%).

The top 10 holdings of IVW account for 45.54% of the total market weight. They are AAPL (13.78%), MSFT (7.47%), NVDA (5.16%), GOOGL (3.85%), GOOG (3.38%), TSLA (2.83%), AMZN (2.61%), UNH (2.34%), XOM (2.24%), and V (1.88%).

Investors should understand the differences between the two investment styles, specifically sector allocations and stock positions. Why? Both investments, the S&P Large-Cap 500 Growth Index (IVW) and the S&P 500 Value Index (IVE) are market capitalization-weighted indexes. And as such, the largest S&P sectors and market-cap S&P 500 stocks influence the directional trends of the two investment-style ETFs.

A brief review of the two ETFs shows an overlap between the two investment styles regarding sector concentrations of S&P 500 sectors. Both ETFs comprise four S&P sectors -Technology, Consumer Discretionary, Financial, and Communication Services.

As expected, IVW or the S&P Growth ETF is heavily concentrated in Technology (36.42%). Surprisingly, IVE, or the S&P Value ETF, is skewed toward Technology as it is the second largest sector in the ETF with 18.23% weighting after Financials (19.18%).

The discrepancy between the two ETFs lies within the top ten market-cap weight names. Again, as expected, IVW consists of Technology/Communication names. Seven of the top ten companies by market-cap weightings are Technology/Telecom related, including AAPL, MSFT, NVDA, GOOGL, and GOOG. Although TSLA and AMZN are consumer discretionary names, many classify them as Technology-driven companies (i.e., Cloud and AI). Again, it is interesting that IVE consists of numerous Technology/Telecom names. Six of the top ten mkt-cap names in IVE are Technology/Telecom related, including MSFT, AMZN, META, CRM, and CSCO.

A deeper dive into the two ETFs strongly suggests large-cap investing through IVW or IVE is about investing in large-cap Technology/Telecom stocks.

Whether growth or value-style investing is superior does not matter today.

A deeper dive into the two ETFs strongly suggests large-cap investing through IVW or IVE is currently about investing in large-cap Technology/Telecom stocks.

It still comes down to the concentration of the largest sectors in the ETFs and specifically to the largest market-cap weighted names in the ETFs.

It may change in the future, but today, if you are investing in IVE or IVW, you are buying the largest S&P 500 Technology, Telecom, and Consumer Discretionary companies.

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